UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 or 15 (D) OF THE SECURITES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2006
[_] TRANSISTION REPORT UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER: 0-21419
NETFABRIC HOLDINGS, INC.
(Exact Name of Small Business Issuer as Specified Its Charter)
Delaware 76-0307819
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
Three Stewart Court
Denville, New Jersey, 07834
(Address of Principal Executive Offices)
(973)-887-2785
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 10, 2006, 62,833,883 shares
of common stock, $.001 par value per share, of the issuer were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
NETFABRIC HOLDINGS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statement of Stockholders'
Equity 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 3. Controls and Procedures 27
PART II. OTHER INFORMATION 27
Signatures 28
NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2006 2005
(UNAUDITED) (NOTE 2)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 240,861 $ 9,540
Trade accounts receivable, net 1,497,055 2,090,201
Due from related party 263,490 192,056
Prepaid expenses and other current assets 113,780 78,119
------------ ------------
Total current assets 2,115,186 2,369,916
Property and equipment, net 159,201 164,984
Goodwill 13,982,451 13,982,451
Other intangibles, net 1,044,713 1,099,717
Other assets 22,572 9,994
------------ ------------
TOTAL ASSETS $ 17,324,123 $ 17,627,062
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bridge loans, net of unamortized discount $ 459,018 $ 441,125
Convertible debentures payable to stockholders and director,
net of unamortized discounts 566,667 366,666
Note payable to officer, net of unamortized discount -- 100,941
Loans and advances from officer and stockholders 32,639 202,639
Accounts payable and accrued liabilities 2,144,866 2,988,410
Accrued compensation 395,362 380,722
Deferred revenues and customer advances 1,137,743 66,019
Revolving note, net of unamortized discount 459,093 --
------------ ------------
Total current liabilities 5,195,388 4,546,522
Convertible note, net of unamortized discount 67,062 --
Derivative financial instruments -- 4,087,517
Convertible debentures, net of unamortized discount -- 612,059
------------ ------------
Total liabilities 5,262,450 9,246,098
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Common Stock, $.001 par value, 100,000,000 shares
authorized, 62,508,883 and 62,448,357 shares
issued and outstanding, respectively 62,509 62,448
Additional paid-in capital 32,328,292 16,657,804
Deferred employee compensation -- (36,478)
Accumulated deficit (20,329,128) (8,302,810)
------------ ------------
Total stockholders' equity 12,061,673 8,380,964
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,324,123 $ 17,627,062
============ ============
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1
NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2006 MARCH 31, 2005
(UNAUDITED) (UNAUDITED)
-------------- --------------
Revenues $ 4,099,946 $ --
-------------- --------------
OPERATING EXPENSES:
Direct employee compensation and
consultant expenses 2,997,103 2,733
Non-cash charge for compensation 94,776 --
Selling, general and administrative expenses 1,637,476 622,608
Research and development -- 134,475
Non-cash charge for dispute settlements 9,492,070 --
Depreciation and amortization 90,235 15,290
-------------- --------------
Total operating expenses 14,311,660 775,106
-------------- --------------
Loss from operations (10,211,714) (775,106)
-------------- --------------
OTHER INCOME / (EXPENSE):
Amortization of debt discounts and debt
issuance costs (1,452,647) (221,873)
Interest and bank charges (77,232) (10,951)
Gain on derivative financial instruments 336,352 --
Debt extinguishment costs (621,077) --
-------------- --------------
Total other expenses (1,814,604) (232,824)
-------------- --------------
NET LOSS $ (12,026,318) $ (1,007,930)
============== ==============
Net loss per common share, basic and diluted $ (0.19) $ (0.03)
============== ==============
Weighted average number of shares
outstanding, basic and diluted 62,491,398 36,429,982
============== ==============
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK
---------------------------
ADDITIONAL
SHARES PAR VALUE PAID-IN CAPITAL
------------ ------------ ---------------
Balances at December 31, 2005 62,448,357 $ 62,448 $ 16,657,804
Issuance of shares in connection with settlement of payables 60,526 61 57,439
Value of contributions from shareholder in connection with
settlement of disputes -- -- 9,492,070
Employee share-based compensation -- -- 89,619
Reclassification of deferred employee stock option
compensation -- -- (36,478)
Allocation of value to beneficial conversion feature in
connection with issuance of convertible note -- -- 511,577
Issuance of warrants in connection with debt financing -- -- 1,432,743
Reissuance of warrants in connection with debt extinguishment -- -- 372,353
Reclassification of derivative financial instrument
relating to beneficial conversion feature -- -- 804,307
Reclassification of derivative financial instrument relating
to warrants -- -- 2,946,858
Net loss -- -- --
------------ ------------ ---------------
BALANCES AT MARCH 31, 2006 (UNAUDITED) 62,508,883 $ 62,509 $ 32,328,292
============ ============ ===============
DEFERRED ACCUMULATED TOTAL
COMPENSATION DEFICIT STOCKHOLDERS' EQUITY
------------ ------------ ---------------------
Balances at December 31, 2005 $ (36,478) $ (8,302,810) $ 8,380,964
Issuance of shares in connection with settlement of payables -- -- 57,500
Value of contributions from shareholder in connection with
settlement of disputes -- -- 9,492,070
Employee share-based compensation -- -- 89,619
Reclassification of deferred employee stock option
compensation 36,478 -- --
Allocation of value to beneficial conversion feature in
connection with issuance of convertible note -- -- 511,577
Issuance of warrants in connection with debt financing -- -- 1,432,743
Reissuance of warrants in connection with debt extinguishment -- -- 372,353
Reclassification of derivative financial instrument
relating to beneficial conversion feature -- -- 804,307
Reclassification of derivative financial instrument relating
to warrants -- -- 2,946,858
Net loss -- (12,026,318) (12,026,318)
------------ ------------ ---------------------
BALANCES AT MARCH 31, 2006 (UNAUDITED) $ -- $(20,329,128) $ 12,061,673
============ ============ =====================
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2006 MARCH 31, 2005
(UNAUDITED) (UNAUDITED)
-------------- --------------
OPERATING ACTIVITIES
Net loss $ (12,026,318) $ (1,007,930)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash charge for common stock issued for rent -- 12,500
Non-cash charge for options issued
to non-employees 5,156 5,156
Non-cash charge for interest expense 22,500 --
Non-cash charge for settlement of disputes 9,492,070 --
Non-cash charge for reissuance of warrants in connection with
debt extinguishment 372,353 --
Non-cash charge for amortization
of employee deferred compensation -- 18,308
Non-cash charge for employee share-based compensation 89,619
Non-cash gain on derivative financial instrument (336,352) --
Amortization of debt discounts 1,444,529 221,873
Amortization of debt issuance costs 8,118 --
Depreciation and amortization 90,235 15,290
Changes in operating assets and liabilities:
Inventory -- (25,278)
Trade accounts receivable 593,146 --
Due from related party (71,434) --
Prepaid expenses and other current assets (40,818) (6,888)
Accounts payable and accrued liabilities (808,542) 12,076
Accrued compensation 14,640 --
Deferred revenues and customer advances 1,071,724 --
-------------- --------------
Net cash used in operating activities (79,374) (754,893)
-------------- --------------
INVESTING ACTIVITIES
Purchases of property and equipment (29,448) (17,125)
-------------- --------------
Net cash used in investing activities (29,448) (17,125)
-------------- --------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 1,000,000
Repayment of note to officer (200,000) --
Repayment of loans from officer and director (170,000) --
Repayment of convertible debentures (1,658,160) --
Proceeds from issuance of revolving note, net 958,500
Proceeds from issuance of convertible note, net 1,430,500
Debt issuance costs (20,697) --
-------------- --------------
Net cash provided by financing activities 340,143 1,000,000
-------------- --------------
NET INCREASE IN CASH 231,321 227,982
CASH AT BEGINNING OF PERIOD 9,540 67,719
-------------- --------------
CASH AT END OF PERIOD $ 240,861 $ 295,701
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 32,860 $ 12,500
============== ==============
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND MANAGEMENT'S PLANS
NetFabric Holdings, Inc. ("Holdings", "our", "we" or the "Company") (formerly
known as Houston Operating Company, Inc.) was incorporated under the laws of the
State of Delaware on August 31, 1989. On December 9, 2004, Holdings entered into
an Exchange Agreement (the "Acquisition Agreement" or "Share Exchange") with all
of the stockholders of NetFabric Corporation ("NetFabric") whereby Holdings
acquired all of the issued and outstanding capital stock of NetFabric and
NetFabric became a wholly-owned subsidiary of Holdings. This transaction was
treated as a reverse merger, and a capital transaction, equivalent to the
issuance of stock by NetFabric for Holdings' net assets and accordingly, the
historical financial statements prior to December 9, 2004 are those of
NetFabric. (Holdings and its subsidiaries are collectively referred to as
"Holdings").
NetFabric, a Delaware corporation incorporated on December 17, 2002, began
operations in July 2003. NetFabric develops and markets Voice Over Internet
Protocol ("VoIP") appliances that simplify the integration of standard telephone
systems with an IP infrastructure. During the fiscal quarter ended March 31
2006, NetFabric scaled back its VoIP operations including product development
efforts and was continuing to explore possible strategic opportunities for VoIP
operations (See Note 11).
On May 20, 2005, Holdings entered into and closed on a share exchange agreement
("Exchange Agreement"), whereby Holdings acquired all of the issued and
outstanding shares of UCA Services, Inc. ("UCA Services"), a New Jersey company,
from its shareholders in exchange for the issuance of 24,096,154 shares of
common stock of Holdings (See Note 4). Holdings emerged from the development
stage upon the acquisition of UCA Services.
UCA Services, a New Jersey company, is an information technology ("IT") services
company that serves the information needs of a wide range of Fortune 500 and
small to mid-size business ("SMB") clients in the financial markets industry as
well as the pharmaceutical, health care and hospitality sectors. UCA Services
delivers a broad range of IT services the practice areas of infrastructure
builds and maintenance, application development and maintenance, managed
services and professional services.
MANAGEMENT'S PLANS
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis. As shown in the accompanying condensed consolidated
financial statements, the Company has incurred accumulated losses totaling
$20,329,128 and a working capital deficit of $3,080,202 at March 31, 2006. These
factors, among others, indicate that the Company may be unable to continue as a
going concern. The condensed consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Management recognizes that the Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to allow the Company
to continue the development of its business plans and satisfy its current and
long-term obligations on a timely basis. The Company believes that it will be
able to complete the necessary steps in order to meet its cash requirements
throughout fiscal year 2006 and continue its business development efforts.
Management's plans in this regard include, but are not limited to, the
following:
o Current discussions and negotiations with a number of additional
financing alternatives, one or more of which management believes
will be able to successfully close to provide necessary working
capital. There is no assurance that the Company will be successful
in completing a financing.
In order to execute its business plan and achieve its objectives for the near
future, management believes it will require approximately $2,500,000 over the
remainder of fiscal year 2006 for working capital. A significant component of
this is for satisfying the Company's obligations as they become due, both
borrowing and vendor payables. Accordingly, the Company needs to raise
additional financing and generate cash flows from its operations. Should
additional cash flows not be available, management believes that the Company
would have the ability to restructure its operations and if necessary initiate
significant reductions in expenses. In addition, the Company will have to
negotiate with its lenders to extend the repayment dates of its indebtedness.
There can be no assurance, however, that the Company will be able to
successfully restructure its operations or debt obligations in the event it
fails to obtain additional financing.
5
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PRACTICES
BASIS OF PRESENTATION / INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations. However the Company believes that the
disclosures are adequate to make the information presented not misleading. The
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) that are, in the opinion of management, necessary for a
fair presentation of the Company's financial position and results of operations.
The operating results for the three months ended March 31, 2006 and 2005 are not
necessarily indicative of the results to be expected for any other interim
period or any future year. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the Company's December
31, 2005 consolidated financial statements, including the notes thereto, which
are included in the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2005 filed on April 17, 2006.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior period consolidated
financial statements to conform to the current period presentation.
ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. The
accounting estimates that require management's most difficult and subjective
judgments include provisions for bad debts, depreciable/amortizable lives,
impairment of long-lived assets, accounting for goodwill and intangible assets,
the fair value of the Company's common stock, the fair value of options issued
for services, the allocation of proceeds from certain financings to equity
instruments and other reserves. Because of the uncertainty inherent in such
estimates, actual results may differ from these estimates.
REVENUE RECOGNITION
The Company derives revenue principally from professional services. In
accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition,"
revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed and determinable, collectibility is
reasonably assured, contractual obligations have been satisfied, and title and
risk of loss have been transferred to the customer.
UCA Services derives revenue primarily from professional services, managed IT
services, application development services and from business process management
services. Arrangements with customers for services are generally on a time and
material basis or fixed-price, fixed-timeframe. Revenue on time-and-material
contracts is recognized as the related services are performed. Revenue from
fixed-price, fixed-timeframe service contracts are recognized ratably over the
term of the contract. When the Company receives cash advances from customers in
advance of the service period, amounts are reported as advances from customers
until the commencement of the service period. Billings and collections in excess
of revenue recognized are classified as deferred revenue.
To date NetFabric has had only nominal revenues from VoIP services and its
communication equipment products have been marketed only through a limited
network of distributors and value-added resellers ("VAR"). In the VAR channel,
NetFabric recognizes revenue at the time of shipment if all other contractual
obligations to the VAR have been satisfied. In the distributor channel,
NetFabric recognizes revenue when the distributor sells and ships NetFabric
products to its own VARs, resellers or end-user customers, provided the Company
has satisfied all other terms and conditions with the distributor. Accordingly,
NetFabric receives distribution sales and inventory information regarding its
products from its distributors for the purpose of determining the appropriate
timing of revenue recognition.
6
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. These
estimated losses are based upon historical bad debts, specific customer
creditworthiness and current economic trends. If the financial condition of a
customer deteriorates, resulting in the customer's inability to make payments
within approved credit terms, additional allowances may be required. The Company
performs credit evaluations of its customers' financial condition on a regular
basis, and has not experienced any material bad debt losses to date. The Company
did not record any provisions for doubtful accounts during the three months
ended March 31, 2006 and 2005.
LONG-LIVED ASSETS
Long-lived assets, including property and equipment and intangible assets with
finite lives, are monitored and reviewed for impairment in value whenever events
or changes in circumstances indicate that the carrying amount of any such asset
may not be recoverable. The determination of recoverability is based on an
estimate of undiscounted cash flows expected to result from the use of an asset
and its eventual disposition. The estimated cash flows are based upon, among
other things, certain assumptions about expected future operating performance,
growth rates and other factors. Estimates of undiscounted cash flows may differ
from actual cash flows due to factors such as technological changes, economic
conditions, and changes in the Company's business model or operating
performance. If the sum of the undiscounted cash flows (excluding interest) is
below the carrying value, an impairment loss is recognized, measured as the
amount by which the carrying value exceeds the fair value of the asset.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
reduces credit risk by placing its cash with major financial institutions with
high credit ratings. At times, such amounts may exceed Federally insured limits.
The Company reduces credit risk related to accounts receivable by routinely
assessing the financial strength of its customers and maintaining an appropriate
allowance for doubtful accounts.
The Company's services have been provided primarily to a limited number of
clients located worldwide in a variety of industries. The Company had revenues
from 3 clients representing 52% (29%, 12% and 11%, respectively) of revenues
during the three months ended March 31, 2006.
The Company generally does not require its clients to provide collateral.
Additionally, the Company is subject to a concentration of credit risk with
respect to its accounts receivable. The Company had 2 clients accounting for 45%
(28% and 17%, respectively) of total gross accounts receivable as of March 31,
2006.
GOODWILL
Goodwill represents the Company's allocation of the cost to acquire UCA Services
in excess of the fair value of net assets acquired. The purchase price and its
allocation, to reflect the fair values of assets acquired and liabilities
assumed, have been based upon management's evaluation, including independent
valuation.
Under SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"),
goodwill is not amortized but is reviewed for impairment annually. The Company
performs its annual goodwill impairment testing, by reportable segment, in the
second quarter of each year, or more frequently if events or changes in
circumstances indicate that goodwill may be impaired. Application of the
goodwill impairment test requires significant judgments including estimation of
future cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for UCA Services, the useful life over which cash flows
will occur, and determination of UCA Services cost of capital. Changes in these
estimates and assumptions could materially affect the determination of fair
value and/or conclusions on goodwill impairment for UCA Services.
7
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLES
Intangible assets are accounted for under the provisions of SFAS No. 142.
Intangible assets arise from business combinations and consist of customer
relationships and restricted covenants related to employment agreements that are
amortized, on a straight-line basis, over periods of up to six years. The
Company follows the impairment provisions and disclosure requirements of SFAS
No. 142. Accordingly intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's assets and liabilities that qualify as
financial instruments under statement of financial accounting standards ("SFAS")
No. 107 approximate their carrying amounts presented in the balance sheets at
March 31, 2006 and December 31, 2005.
The Company accounts for derivative instruments in accordance with SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," as amended,
("SFAS No. 133") which establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments imbedded in other financial instruments or contracts and requires
recognition of all derivatives on the balance sheet at fair value. Accounting
for the changes in the fair value of the derivative instruments depends on
whether the derivatives qualify as hedge relationships and the types of the
relationships designated are based on the exposures hedged. Changes in the fair
value of derivative instruments which are not designated as hedges are
recognized in earnings as other income (loss).
The Company has issued financial instruments which have required a determination
of the fair value of certain related derivatives, where quoted market prices
were not published or readily available at the date of issuance. The Company
bases its fair value determinations on an evaluation of the facts and
circumstances and valuation techniques that require judgments and estimates.
STOCK-BASED COMPENSATION EXPENSE
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors based on estimated
fair values. SFAS 123(R) supersedes the Company's previous accounting under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") for periods beginning in fiscal 2006. In March 2005, the
SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS
123(R). The Company has applied the provisions of SAB 107 in its adoption of
SFAS 123(R).
SFAS 123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company's condensed
consolidated statement of operations. Prior to the adoption of SFAS 123(R), the
Company accounted for stock-based awards to employees and directors using the
intrinsic value method in accordance with APB 25 as allowed under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under the intrinsic value method, stock-based
compensation expense was recognized in the Company's condensed consolidated
statement of operations based on the difference between the exercise price of
the Company's stock options granted to employees and directors, and the fair
market value of the underlying stock at the date of grant.
The Company adopted SFAS 123(R) using the modified prospective transition
method, which requires the application of the accounting standard as of January
1, 2006, the first day of the Company's fiscal year. The Company's condensed
consolidated financial statements as of and for the three months ended March 31,
2006 reflect the impact of adoption of SFAS 123(R). In accordance with the
modified prospective transition method, the Company's condensed consolidated
financial statements for prior periods have not been restated to reflect, and do
not include, the impact of adoption of SFAS 123(R). Stock-based compensation
expense recognized under SFAS 123(R) for the three months ended March 31, 2006
was $89,619. Stock-based compensation expense related to employee stock options
accounted for under APB 25 was $18,308 during the three months ended March 31,
2005.
8
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Share-based compensation expense recognized in the Company's condensed
consolidated statements of operations for the three months ended March, 31, 2006
includes compensation expense for share-based payment awards granted prior to,
but not yet vested as of December 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123.There have been no
grants of share-based awards to employees during the three months ended March
31, 2006.
SFAS 123(R) requires forfeitures to be estimated at the time of grant in order
to estimate the amount of share-based awards that will ultimately vest. As there
were only a nominal amount of option holders as of January 1, 2006, management
evaluated each of the grants outstanding upon adoption of SFAS 123(R) to
determine an appropriate forfeiture rate. Based on this evaluation and
considering options which were cancelled during management's evaluation in the
fiscal quarter ended March 31, 2006, the Company adjusted the value of the
options outstanding as of January 1, 2006 for actual cancellations during the
three months ended March 31, 2006. After adjusting for the value such
cancellations, management determined that a forfeiture rate was not required for
the remaining outstanding option grants. This determination was based
principally on the nature of the option holder's involvement with the Company
and the quantity held by such individuals. In the Company's pro forma
information required under SFAS 123 for the periods prior to fiscal year 2006,
the Company accounted for forfeitures as they occurred.
On November 10, 2005, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. FAS 123(R)-3 "Transition Election Related to Accounting
for Tax Effects of Share-Based Payment Awards." The Company has elected to adopt
the alternative transition method provided in the FASB Staff Position for
calculating the tax effects of stock-based compensation pursuant to SFAS 123(R).
The alternative transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool ("APIC pool") related
to the tax effects of employee stock-based compensation, and to determine the
subsequent impact on the APIC pool and consolidated statements of cash flows of
the tax effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS 123(R).
Share-based compensation expense to employees and directors reduced the
Company's results of operations by $89,619.
The net loss for the three months ended March 31, 2005 includes compensation
charges related to options granted to employees based on the intrinsic value
method. The following table illustrates the proforma effect on net loss and loss
per share assuming the Company had applied the fair value recognition provisions
of SFAS 123, as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" ("SFAS 148"), instead of the intrinsic
value method under APB No. 25 to stock based employee compensation for the three
months ended March 31, 2005:
9
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS
ENDED
MARCH 31, 2005
--------------
Net loss available to common stockholders,
as reported $ (1,007,930)
Add: Stock-based employee compensation
expense included in reported loss 18,308
Deduct: Total stock-based compensation expense
determined under the fair value based method (291,037)
--------------
Net loss available to common stockholders,
pro forma $ (1,280,659)
==============
Loss per Common Share--Basic and Diluted:
As reported $ (0.03)
Pro forma $ (0.04)
As of March 31, 2006, the unvested portion of share-based compensation expense
to employees and directors and the period in which such expense is expected vest
and be recognized is as follows:
2006 $ 268,857
2007 101,427
2008 80,125
2009 38,505
---------
$ 488,914
=========
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not that the tax benefits will not
be realized. The ultimate realization of deferred tax assets depends upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.
EARNINGS (LOSS) PER SHARE
The Company calculates earnings (loss) per share in accordance with SFAS No.
128, "Earnings per Share." SFAS No. 128 computes basic earnings (loss) per share
by dividing the net income (loss) by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings (loss) per share is
computed by dividing the net income (loss) by the weighted average number of
shares of common stock outstanding during the period plus the effects of any
dilutive securities. Diluted earnings (loss) per share considers the impact of
potentially dilutive securities except in periods in which there is a loss
because the inclusion of the potential common shares would have an anti-dilutive
effect. The Company's potentially dilutive securities include common shares
which may be issued upon exercise of its stock options, exercise of warrants or
conversion of convertible debt.
Diluted loss per share for the three months ended March 31, 2006 and 2005
exclude potentially issuable common shares of approximately 16,568,624 and
8,987,526, respectively, primarily related to the Company's outstanding stock
options, warrants and convertible debt, because the assumed issuance of such
potential common shares is antidilutive.
SEGMENT REPORTING
The Company determines and discloses its segments in accordance with SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
which uses a "management" approach for determining segments.
10
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of a company's reportable segments. SFAS No. 131 also requires
disclosures about products or services, geographic areas and major customers.
NOTE 3. INTANGIBLE ASSETS
The Company's intangible assets consisting of customer contacts and restricted
covenants related to employment agreements were acquired and accounted for using
the purchase method of accounting. The following table summarizes the net asset
value for each intangible asset category as of March 31, 2006:
Gross Asset Accumulated Net Asset
Value Amortization Value
----------- ------------ -----------
Customer relationships $ 1,153,424 $ (168,207) $ 985,217
Covenants not to compete 83,333 (23,837) 59,496
----------- ------------ -----------
$ 1,236,757 $ (192,044) $ 1,044,713
=========== ============ ===========
The Company did not have any intangibles prior to the acquisition of UCA
Services in May 2005.
NOTE 4. ACQUISITION
The Company acquired UCA Services on May 20, 2005. Pursuant to the terms of the
Exchange Agreement, Holdings acquired all of the issued and outstanding shares
of UCA Services from the UCA Services' shareholders in exchange for the issuance
of 24,096,154 shares of common stock of Holdings. The acquisition was accounted
for as a business combination with Holdings as the acquirer. Under the purchase
method of accounting, the assets and liabilities of UCA Services acquired by
Holdings are recorded as of the acquisition date at their respective fair
values, and added to those of Holdings, and the results of UCA Services have
been included with those of the Company since the date of acquisition.
The purchase price of $14,010,000 consists of $13,823,000 of common stock,
$187,000 of acquisition costs, the assumption of $1,209,208 of net liabilities
and the recognition of $1,236,757 of intangibles assets associated with customer
relationships and non-compete covenants of employment agreements. The fair value
of Holdings' common stock issued in exchange for the shares of UCA Services was
based an independent appraisal of assets acquired and liabilities assumed.
The determination of the purchase price and its allocation to the fair values of
the assets acquired and liabilities acquired as reflected in the consolidated
financial statements have been based on the Company's valuation, including the
use of an independent appraisal. The fair value of the assets and liabilities
assumed in the acquisition of UCA Services are as follows:
Accounts receivable $ 2,153,968
Property, plant, other assets and equipment 190,602
Customer relationship intangible 1,153,424
Non-compete intangible 83,333
Accounts payable and accrued expenses (2,481,077)
Deferred revenue and advances (1,072,701)
-----------
Net assets acquired $ 27,549
===========
The Company recognized goodwill of $13,982,451 as a result of the excess of cost
in excess of the net assets acquired of UCA Services. Such goodwill is assigned
to the Company's IT services segment. Any amortization of such goodwill will not
be deductible for tax purposes.
11
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summarized below are the pro forma unaudited results of operations for the three
months ended March 31, 2005 as if the results of UCA Services were included for
the entire periods presented. The pro forma results may not be indicative of the
results that would have occurred if the acquisition had been completed at the
beginning of the period presented or which may be obtained in the future:
For the three
months ended,
March 31, 2005
--------------
Revenues $ 4,173,834
Net loss (1,658,181)
Basic and diluted loss per share $ (0.03)
Weighted average common shares outstanding 60,526,136
NOTE 5. DEBT FINANCINGS
Debt financings consist of the following as of March 31, 2006 and December 31,
2005:
March 31, 2006
--------------------------------------------
Unamortized
Principal Debt Discount Net
----------- -------------- -----------
Macrocom Bridge Loan II, due October 10, 2006 $ 500,000 $ (40,982) $ 459,018
Macrocom Convertible Debenture due April 15, 2006 500,000 (27,778) 472,222
Convertible debentures payable to stockholder and director
due April, 15, 2006 100,000 (5,555) 94,445
Laurus Revolving Note due February 10, 2009 1,028,000 (568,907) 459,093
Laurus Convertible Note due February 10, 2009 1,500,000 (1,432,938) 67,062
Loans and advances from officer and directors 32,639 -- 32,639
----------- -------------- -----------
$ 3,660,639 $ (2,076,160) $ 1,584,479
=========== ============== ===========
During the three months ended March 31, 2006, $1,444,529 of the debt discounts
were amortized on the accompanying condensed statements of operations. During
the three months ended March 31, 2005, $221,873 of debt discounts were
amortized.
December 31, 2005
--------------------------------------------
Unamortized
Principal Debt Discount Net
----------- -------------- -----------
Macrocom Bridge Loan II, due October 10, 2006 $ 500,000 $ (58,875) $ 441,125
Macrocom Convertible Debenture due April 15, 2006 500,000 (194,444) 305,556
Convertible debentures payable to stockholder and director
due April, 15, 2006 100,000 (38,890) 61,110
Cornell convertible debenture 1,658,160 (1,046,101) 612,059
Note payable issued to officer 200,000 (99,059) 100,941
Loans and advances from officer and directors 202,639 -- 202,639
----------- -------------- -----------
$ 3,160,799 $ (1,437,369) $ 1,723,430
=========== ============== ===========
12
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Macrocom Bridge Loans
On July 22, 2004, NetFabric entered into a financing agreement which was amended
on December 2, 2004 (the "Financing Agreement") with Macrocom Investors, LLC,
("Macrocom") whereby Macrocom provided a loan to NetFabric in the amount of
$500,000 ("Loan I") for a period of 180 days from the original date of the
Financing Agreement ("Due Date") at an annual simple interest rate of 5%. On the
Due Date, the Company had the option to repay the principal in cash or in kind
by issuing 1,000,000 shares of common. In either event, the interest on Loan I
was payable in cash on the Due Date. Additionally, in connection with the
Financing Agreement the Company issued to Macrocom 250,000 shares of common
stock at a fair value of $144,000 as additional consideration for Loan I in
December 2004. In January 2005, in accordance with the terms of the Financing
Agreement, the Company elected to repay the principal of Loan I in kind by
issuing 1,000,000 shares of common stock. On October 14, 2004, NetFabric and
Macrocom Investors, LLC ("Macrocom") entered into a loan agreement which was
amended on December 2, 2004 (the "Loan Agreement"), whereby Macrocom agreed to
loan an additional $500,000 to NetFabric ("Loan II" or the "Second Loan"), due
180 days from the original date of the Loan Agreement ("Second Due Date") at an
annual simple interest rate of 5%. On the Second Due Date, at the option of
Macrocom, Macrocom could convert the principal of the Second Loan into 1,000,000
shares of common stock or demand repayment of the principal in cash. In either
event, the interest on the Second Loan was payable in cash on the Second Due
Date. In addition, in December 2004 the Company issued to Macrocom 250,000
shares of common stock with a fair value of $144,000 as additional consideration
for the Second Loan. As noted below, on the Second Due Date in April 2005
Macrocom did not request repayment or conversion to common stock of Loan II.
As a result of the Loan I and Loan II financing transactions, total debt
discounts of $411,403 were recorded on Loan I and Loan II (the "Bridge Loans")
during 2004, including the value of the beneficial conversion feature of
$187,801 on Loan II. During the three months ended March 31, 2005, $221,873,
respectively of the discounts were amortized on the accompanying consolidated
statements of operations.
On May 24, 2005, NetFabric and Macrocom entered into an agreement to amend the
Loan Agreement between the parties. Under the terms of the amendment, the due
date for Loan II was extended from April 10, 2005 until October 10, 2005. At the
same time and in connection with the extension of the due date for Loan II,
Macrocom and Holdings also amended the terms of the Financing Agreement with
respect to a warrant Macrocom originally received on December 9, 2004. The
warrant was set to expire on June 7, 2005; however, the parties agreed to extend
the term of the warrant until December 9, 2006. As a result of these changes in
terms, a debt discount of $392,196 was recorded on April 11, 2005 on Loan II.
On October 10, 2005 Macrocom did not require repayment or conversion of Loan II
to common stock. The Company and Macrocom agreed to extend the due date for Loan
II until October 10, 2006. As a result of the modification of the term, a debt
discount of $100,758 was recorded on October 10, 2005 on Loan II which will be
amortized from October 11, 2005 through October 10, 2006. During the three
months ended March 31, 2006, $17,893 of the discount was amortized on the
accompanying consolidated statements of operations.
Employee Note
An officer of the Company and an employee of UCA Services, advanced $200,000 to
the Company during 2005. In December 2005 the Company and the employee entered
into a Promissory Note (the "Employee Note") related to the advance. The
Employee Note bears interest at a rate of 5% per annum and a fee of $10,000 is
due to the employee at maturity. The principal balance of the Employee Note
together with accrued and unpaid interest and the fee were due and payable in
one installment on January 31, 2006. The Company repaid the balance owed in
February 2006. In connection with the Employee Note, on December 8, 2005 the
Company's Board of Directors authorized for issuance warrants to the employee to
acquire 300,000 shares of our common stock at an exercise price of $1.00 per
share. The warrants were issued on January 24, 2006 and expire on January 24,
2009.
Macrocom Convertible Debentures
On July 19, 2005, the Company issued a convertible debenture in the amount of
$500,000 to Macrocom Investors, LLC ("Macrocom") (the "Macrocom Debenture"). The
Macrocom Debenture bears interest at 5% per annum and is due on April 15, 2006.
At the option of Macrocom, the Macrocom Debenture may be converted into shares
of the Company's common stock at a conversion price of $.50 per share. The
Company also issued Macrocom warrants to acquire 1,000,000 shares of the
Company's common stock at an exercise price of $1.50 per share. The warrants
expire in three years from the date of issuance. Additionally, the Company
issued 375,000 shares of the Company's common stock to Macrocom as additional
consideration. As collateral for the Macrocom Debenture, the Company placed
5,000,000 shares of its common stock with an escrow agent.
13
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company allocated the $500,000 of proceeds received from the Macrocom
Debenture based on the computed relative fair values of the debt, warrants and
stock instruments issued. Additionally, the resulting relative fair value
allocated to the debt component was used to measure the intrinsic value of the
embedded conversion option of the Macrocom Debenture which resulted in a
beneficial conversion feature recorded to additional paid-in capital. The value
of the beneficial conversion feature was limited to the amount of the proceeds
allocated to the debt component of the Macrocom Debenture. The aggregate amounts
allocated to the warrants, stock instruments and beneficial conversion feature,
of $500,000 were recorded as a debt discount at the date of issuance of the
Macrocom Debenture and are being amortized to interest expense using the
interest method over the stated term of the Macrocom Debenture. During the three
months ended March 31, 2006, $166,666 of discount was accreted and recorded as
interest expense resulting in a carrying value of $472,222 on the Macrocom
Debenture at March 31, 2006. In April 2006, the Macrocom Debenture was repaid in
full from the proceeds of a debt financing (See Note 11).
Director and Officer Convertible Debentures
On July 19, 2005, the Company agreed with a director and an entity affiliated
with an officer of the Company, that aggregate advances of $100,000 made in June
2005 from the director and entity affiliated with the officer to the Company be
structured as convertible debentures in the face amount of $50,000 each
("Related Party Convertible Debentures"). The Related Party Convertible
Debentures were sold on substantially similar terms as the Macrocom Debenture
and, accordingly, bear interest at 5% per annum, are due on April 15, 2006. At
the option of the holder, the Related Party Convertible Debentures may be
converted into shares of the Company's common stock at a conversion price of
$.50 per share. Additionally, in connection with the sale of the Related Party
Convertible Debentures, the Company issued warrants to each holder to acquire
200,000 shares (or 100,000 each debenture) of the Company's common stock at an
exercise price of $1.50 per share which expire in three years from the date of
issuance. The Company also issued 75,000 shares (or 37,500 for each debenture)
of the Company's common stock to the stockholder and the entity affiliated with
an officer as additional consideration. The Company did not provide any
collateral.
The Company allocated the $100,000 of proceeds received from the Related Party
Convertible Debentures based on the computed relative fair values of the debt,
warrant and stock instruments issued. Accordingly, the resulting relative fair
value allocated to the debt component was used to measure the intrinsic value of
the embedded conversion option of the Related Party Convertible Debentures which
resulted in a beneficial conversion feature recorded to additional paid-in
capital. The aggregate amounts allocated to the warrants, stock instruments and
beneficial conversion feature, of $100,000 were recorded as a debt discount at
the date of issuance of the Related Party Convertible Debentures and are being
amortized to interest expense using the interest method over the stated term of
the Related Party Convertible Debentures. During the three months ended March
31, 2006, $33,334 of discount has been accreted and recorded as interest expense
resulting in a carrying value of $94,445 on the Related Party Convertible
Debentures at March 31, 2006.
Cornell Convertible Debentures
On July 5, 2005, the Company entered into an agreement pursuant to which the
Company was to sell Cornell Capital Partners, LP ("Cornell") secured convertible
debentures in the aggregate principal amount of $1,000,000, which are
convertible, at Cornell's discretion, into common stock of the Company. A
$400,000 debenture was funded in July 2005, and a $50,000 debenture was funded
in September 2005 (collectively the "Original Cornell Debentures"). In
connection with the Original Cornell Debentures, the Company issued Cornell
warrants to acquire 560,000 shares of its common stock at an exercise price
$0.50 per share as additional consideration. The Original Cornell Debentures may
be redeemed at the Company's option at any time, in whole or in part prior to
maturity at a redemption premium of 15% of the principal amount redeemed in
addition to principal and accrued interest.
On October 27, 2005, at the same time as the Termination Agreement for the SEDA,
the Company entered into a Securities Purchase Agreement (the "Securities
Purchase Agreement") with Cornell whereby the Company and Cornell agreed to
amend and consolidate all of the Original Convertible Debentures, and related
accrued interest of $8,160, issued to Cornell through October 26, 2005 into one
new secured convertible debenture in the principal amount of $1,658,160 (the
"October Cornell Debenture"). The October Cornell Debentures have the same terms
and provisions of the Original Cornell Debentures except that the October
Cornell Debentures no longer has a fixed conversion by the holder but is
convertible at the option of the holder at the lesser of (i) $1.00 or (ii) an
amount equal to 95% of the lowest closing bid price of the Company's common
stock for the 30 trading days immediately proceeding the conversion date.
Pursuant to the Securities Purchase Agreement, Cornell funded the remaining
$1,200,000 balance of October Cornell Debenture on October 27, 2005. The October
Cornell Debenture was repaid in full in February 2006 (the "Cornell Repayment"),
with the proceeds received from a new debt financing described below.
14
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As a result of the change in the conversion terms of the October Convertible
Debenture on October 27, 2005, the Company determined that the embedded
conversion feature of the October Cornell Debenture became subject to the
provisions of SFAS No. 133 and therefore the Company accounted for the embedded
conversion feature as a liability in accordance with the guidance of EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock"("EITF 00-19"). Accordingly, the Company
recorded the fair value of the embedded conversion feature of $784,784 as a
non-current liability on its balance sheet as of October 27, 2005 and a portion
of the amounts previously recorded to additional paid-in capital as part of the
Original Cornell Debentures were reclassified from equity to liabilities. For
the three months ended March 31, 2006 the Company recorded a gain in value for
derivative financial instruments of $201,754 related to the change in fair value
of the embedded conversion feature which is recorded in the accompanying
condensed consolidated statement of operations. As a result of the Cornell
Repayment the value of the embedded conversion feature was reclassified to
additional paid-in capital in February 2006.
After the allocation of value to the embedded conversion feature of the October
Cornell Debenture the Company allocated the remaining $873,376 principal amount
of the total $1,658,160 October Cornell Debenture based on the computed relative
fair values of the debt and warrant components, which resulted in additional
debt discounts of $210,665. As a result of the Cornell Repayment, the remaining
unamortized debt discounts were amortized as of the date of the Cornell
Repayment. Accordingly, $1,045,678 of amortization expense related to discount
on the October Cornell Debentures was recorded in the accompanying condensed
consolidated statement of operations during the three months ended March 31,
2006.
As part of the Cornell Repayment the Company paid an early redemption premium
charge of $248,724, calculated based on 15% of the principal amount redeemed,
which is included in Debt extinguishment costs on the accompanying condensed
consolidated statement of operations for the three months ended March 31, 2006.
In connection with the Cornell Repayment the Company also agreed to reduce the
exercise price of the 560,000 warrants previously issued to Cornell from $0.50
to $0.40. The change in exercise price of the warrants was treated as a new
issuance of warrants and was valued using the Black Scholes option-pricing model
with the following assumptions: (1) common stock fair value of $0.95 per share
(2) expected volatility of 71.26%, (3) risk-free interest rate of 4.62%, (4)
life of 2.71 years and (5) no dividend. The change in exercise price resulted in
a fair value of $372,353 for the warrants which was charged to debt
extinguishment costs on the accompanying condensed consolidated statement of
operations for the three months ended March 31, 2006.
The Company and Cornell entered into a Registration Rights Agreement (the
"Cornell Registration Rights") related to the October Cornell Debenture. As a
result of the Cornell Repayment the Company's obligations under the Cornell
Registration Rights were terminated.
Laurus Convertible and Non Convertible Financings
On February 14, 2006, the Company entered into a Security Agreement, dated
February 10, 2006 with Laurus Master Fund, Ltd ("Laurus"). Under the Security
Agreement, Laurus purchased from the Company a Secured Convertible Note (the
"Laurus Convertible Note"), with a maturity date of February 10, 2009, in the
aggregate principal amount of $1,500,000 and a Secured Non-Convertible Revolving
Note (the "Laurus Revolving Note"), in the aggregate principal amount of
$1,500,000. The Laurus Convertible Note and the Laurus Revolving Note are
collectively the "Laurus Notes". The Company's ability to receive financing
under the Laurus Notes is based on an advance rate equal to 90% of eligible
accounts receivable, as defined. However, Laurus has agreed to provide the
Company an over advance until July 30, 2007. Through March 31, 2006 $1,500,000
was advanced for the Laurus Convertible Note and $1,028,000 was advanced for the
Laurus Revolving Note.
15
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Laurus Convertible Note has a three-year term, and bears interest at 1%
above the prime rate, with a minimum interest rate of 8%. Laurus has the option,
at any time until February 9, 2009 to convert all or any portion of the Laurus
Convertible Note and accrued interest into shares of the Company's common stock
at a conversion price of $0.91 per share. The Company has the option, to repay
the Laurus Convertible Note by paying Laurus the principal amount, accrued
interest and a certain redemption premium, as defined.
The Laurus Revolving Note has a three-year term and bears interest at 1% above
the prime rate, with a minimum interest rate of 8%.
In connection with the Laurus Notes, the Company issued to Laurus an option (the
"Laurus Option") to purchase up to 4,256,550 shares of the Company's common
stock at an exercise price of $0.001 per share. Additionally, the Company and
Laurus entered into a registration rights agreement (the " Laurus Registration
Rights Agreement") covering the registration of common stock underlying the
Laurus Convertible Note and the Laurus Option.
The Company's obligations under the Laurus Notes are secured by first liens on
all assets of the Company, and Laurus may accelerate all obligations under the
Laurus Notes upon an event of default.
The Company allocated the $1,500,000 of proceeds from the Laurus Convertible
Note based on the computed relative fair values of the debt and stock
instruments issued. The Laurus Options were valued using a Black-Scholes
option-pricing model with the following assumptions: (1) common stock fair value
of $0.95 per share (2) expected volatility of 71.26%, (3) risk-free interest
rate of 4.59%, (4) life of 10 years and (5) no dividend, which resulted in a
fair value of $2,569,546 for the Laurus Options. The resulting relative fair
value of the Laurus Options was $918,923. Accordingly, the resulting relative
fair value allocated to the debt component of $511,577 was used to measure the
intrinsic value of the embedded conversion option of the $1,054,357 which
resulted in a beneficial conversion feature of $511,577 recorded to additional
paid-in capital. The aggregate amounts allocated to the Laurus Options and
beneficial conversion feature, of $1,430,500 were recorded as a debt discount at
the date of issuance of the Laurus Convertible Notes and are being amortized to
interest expense using the interest method over the 3 years. For the three
months ended March 31, 2006 $67,062 of amortization expense was recorded in the
accompanying condensed consolidated statement of operations.
The Company allocated the $1,028,000 of proceeds from the Laurus Revolving Note
based on the computed relative fair values of the debt and Laurus Options. The
Laurus Options were valued using a Black-Scholes option-pricing model with the
following assumptions: (1) common stock fair value of $0.95 per share (2)
expected volatility of 71.26%, (3) risk-free interest rate of 4.59%, (4) life of
10 years and (5) no dividend, which resulted in a fair value of $1,471,494 for
the warrants. The resulting relative fair value of the Laurus Options was
$513,820. Accordingly, the resulting relative fair value allocated to the debt
component was $275,680. The aggregate amount allocated to the warrants of
$513,820 was recorded as a debt discount at the date of issuance of the Laurus
Notes and are being amortized to interest expense using the interest method over
the 3 years.
Transaction fees of $139,000 paid to Laurus and its affiliates in connection
with the Laurus Notes were netted against the proceeds and considered in the
calculation of the beneficial conversion feature. Financing costs of $20,696
paid to third parties associated with the Laurus Notes are included as debt
issuance costs in other assets and amortized over the term of the debt.
The Company utilized approximately $1.9 million of the initial borrowing from
Laurus to repay all amounts owed to October Cornell Debenture.
NOTE 6. STOCKHOLDERS' EQUITY
Common Stock
The Company issued 50,000 shares of common stock to Macrocom in January 2006 in
settlement of accrued interest of $25,000 for the Macrocom Bridge Loan II due on
October 10, 2006.
In January 2006, the Company issued 10,526 shares to a vendor to offset
outstanding trade payables of $10,000.
16
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Contract Termination
In January 2006, the Company and a consultant to the Company terminated a
services arrangement whereby the consultant was to provide services to the
Company over a certain future period. In connection with the termination of this
arrangement, an individual who is an officer, director and stockholder of the
Company transferred one million shares of the Company's common stock owned by
the officer, director and stockholder into escrow. The shares will be held in
escrow for a period of up to five years during which the consultant will have
the option to purchase the shares for an aggregate of $10,000 or $0.01 per
share. As a result, the consultant released the Company from all liabilities.
The Company has accounted for the settlement as an expense in the Company's
financial statements, based on the value of the option of $0.94 per share on the
date of settlement, with a corresponding credit to contributed (paid-in) capital
from the officer, director and stockholder during the three months ended March
31, 2006. The option was valued using a Black-Scholes option-pricing model with
the following assumptions: (1) common stock fair value of $0.95 per share (2)
expected volatility of 71.26%, (3) risk-free interest rate of 4.59%, (4) life of
5 years and (5) no dividend, which resulted in a fair value of $942,070.
Exchange Agreement Amendment
During January and February 2006, the former shareholders of UCA Services with
whom the Company had entered into an Exchange Agreement related to the purchase
of UCA Services (See Note 4) and the Company entered into negotiations related
to a dispute over compliance with the provisions of the Exchange Agreement.
In connection with the discussions, the Company and the former UCA shareholders
entered into an Amendment to the Exchange Agreement ("Exchange Amendment") which
was executed in February 2006. The Exchange Amendment provides that an
individual who is an officer, director and stockholder of the Company transfer
9,000,000 shares (fair value of approximately $8,500,000) of the Company's
common stock owned by such individual to the former shareholders of UCA. This
arrangement was structured whereby the individual surrendered his shares to the
Company, and the Company reissued such shares to former UCA shareholders.
Since the settlement was not a contingency associated with the acquisition of
UCA Services, the Company accounted for the shares transferred by the
individuals as an expense, based on the value of the shares, in the Company's
consolidated financial statements with a corresponding credit to contributed
(paid-in) capital by the individual during the three months ended March 31,
2006. Management determined the fair value of the shares issued based on the
quoted market price of the Company's common stock on the date of settlement.
Other Securities
Outstanding warrant and option securities issued in connection with financings
consist of the following at March 31, 2006 and December 31, 2005:
March 31, 2006
------------------------------------------------------------------------
Warrants Exercise Prices Expiration
-------------- ------------------------- ---------------------------
Laurus 4,256,550 $0.001 n/a
Macrocom warrants 2,000,000 $0.75 12/9/2006
Macrocom warrants 1,000,000 $1.50 7/19/2008
Cornell warrants 560,000 $0.50 10/27/2008
Officer and director warrants, including 664,805 $0.50 to $1.50 12/3/2008 to 12/8/2008
former officers and directors
Other 988,832 $0.50 1/1/2009 to 1/29/2009
-------------
9,470,187
=============
December 31, 2005
------------------------------------------------------------------------
Warrants Exercise Prices Expiration
------------- ----------------------- ----------------------------
Macrocom warrants 2,000,000 $0.75 12/9/2006
Macrocom warrants 1,000,000 $1.50 7/19/2008
Cornell warrants 560,000 $0.50 10/27/2008
Officer and director warrants, including 664,805 $0.50 to $1.50 12/3/2008 to 12/8/2008
former officers and directors
Other 988,832 $0.50 1/1/2009 to 1/29/2009
-------------
5,213,637
=============
17
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Since the conversion of the October Cornell Debenture could result in a
conversion into an indeterminable number of common shares, in October 2005 the
Company determined that under the guidance of EITF 00-19, the Company could not
conclude that it had sufficient authorized and unissued shares to settle any
warrants or options issued to non-employees. Therefore in October 2005, the
Company reclassified the fair value of all warrants and options issued to
non-employees that were outstanding as of October 27, 2005 from equity to
liabilities. The fair value of the Company's warrants and options issued to
non-employees were estimated at approximately $3,065,000 on October 27, 2005
using a Black-Scholes option pricing model for each of the individual
securities. As a result the Company incurred a charge of approximately
$2,035,000 on October 27, 2005, which was computed based on the difference
between the fair value of the securities and the value of the securities as of
October 27, 2005 which had previously been recorded to additional paid-in
capital. On December 31, 2005, the fair value of the warrants and options issued
to non-employees were re-measured and estimated at $2,940,000 using a
Black-Scholes option pricing model for each of the individual securities. For
the three months ended March 31, 2006 the Company recorded a gain of $336,352 on
derivative financial instruments related to the warrants. The liability for
warrants and options issued to non-employees was reclassified to additional
paid-in capital upon the Cornell Repayment in February 2006, which terminated
Cornell's conversion rights.
NOTE 7. STOCK-BASED COMPENSATION
As a result of the Share Exchange, on March 3, 2005, the Board of Directors
adopted the 2005 Stock Option and Grant Plan (the "Plan"). The purpose of the
Plan is to encourage and enable the employees, directors and consultants of the
Company upon whose judgment, initiative and efforts the Company largely depends
for the successful conduct of its business to acquire a proprietary interest in
the Company. The Plan became effective on April 19, 2005 and was authorized with
9,000,000 shares of the Company's common stock.
From time to time, the Company issues stock-based compensation to its officers,
directors, employees and consultants. The maximum term of options granted is
generally 10 years and generally options vest over a period of one to four
years. However, the Board of Directors of the Company may and has approved other
vesting schedules. The Company has issued options to employees and non-employees
under stock option agreements. Options may be exercised in whole or in part.
The exercise price of stock options granted is generally the fair market value
of the Company's common stock as determined by the Board of Directors on the
date of grant.
The following is a summary of the Company's stock option activity for the three
months ended March 31, 2006 :
Weighted Average Aggregate
Options Exercise Price Intrinsic Value
--------- ---------------- ---------------
Outstanding, December 31, 2005 3,869,010 $ 0.63
Options granted -- --
Options exercised -- --
Options cancelled (618,925) 1.57
---------
Outstanding, March 31, 2006 3,250,085 0.35 $1,802,560
========= ================ ==============
Exercisable, March 31, 2006 2,146,375 $ 0.33 $ 200,760
========= ================ ==============
The options outstanding at March 31, 2006 have a weighted average remaining
contractual life of approximately 7.9 years. No options have been exercised to
date.
The fair value of the options granted during the three months ended March 31,
2005 was estimated as of the date of the grant using the Black Scholes option
pricing model, based on the following weighted average assumptions: (1) common
stock fair value of $1.99 per share (2) expected volatility of 100.0%, (3)
risk-free interest rate of 3.97%, (4) life of 5 years and (5) no dividend.
18
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. RELATED PARTY TRANSACTIONS
Loans and advances payable to stockholders and directors on the accompanying
condensed consolidated balance sheet at March 31, 2006 represent amounts owed to
stockholders and directors of the Company for advances of cash provided to the
Company. Convertible debentures payable to stockholders and directors represent
amounts received by the Company pursuant to financings arrangements.
After the acquisition of UCA Services in May 2005, certain shareholders of the
Company are also the owners of UCA Computer Systems, Inc. ("Systems"), a
computer hardware company with which UCA Services has historically had
transactions with.
The Company subleases certain office space and incurs occupancy related costs
under an agreement with UCA Global, Inc. ("Global"), an entity affiliated with a
shareholder of the Company, whereby the Company pays rent and other occupancy
costs based on the proportion of square footage occupied by the Company in
Global's office facility. Rent and occupancy expenses incurred by the Company
under this agreement, which commenced on May 20, 2005, were $31,875 and are
included in selling, general and administrative expenses during the three months
ended March 31, 2006.
In connection with delivering hardware and software to certain of its customers,
Systems has engaged the Company to assist with certain elements of its customer
contracts, including, but not limited to, hardware and software configuration
and implementation. Such services are provided to Systems pursuant to an
arrangement between the Systems and the Company. For the three months ended
March 31, 2006, the Company has not provided any services to Systems.
In the normal course of business, the Company performs services for an entity
affiliated with certain significant stockholders. The Company charged
approximately $50,000 for such services during the three months ended March 31,
2006. At March 31, 2006, approximately $214,000 was owed to the Company,
including amounts owed to UCA Services prior to the acquisition.
NOTE 9. SEGMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" established standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise engaging in business activities about which separate financial
information is available that is evaluated by the chief operating decision maker
or group in deciding how to allocate resources and in assessing performance. The
Company operates in two business segments: VoIP and IT Services. These
reportable segments are strategic business units that are in different phases of
development that the Company manages and finances separately based on the
fundamental differences in their operations. The Company defines segment
earnings as earnings before interest, taxes, depreciation and amortization and
other charges determined to be non-recurring in nature, such as restructuring
and impairment charges.
Information about the Company operating segments, the presentation of which
reflects changes in information that is now being made available to the
Company's chief operating decision maker, is as follows:
IT Services VoIP Corporate Total
----------------------------------------------------------
For the three months ended March 31, 2006
Revenues $ 4,098,446 $ 1,500 $ -- $ 4,099,946
Loss before interest, taxes, depreciation and amortization (210,301) (220,075) (9,691,103) (10,121,479)
Net loss (233,222) (258,035) (11,535,061) (12,026,318)
Total assets 15,357,086 465,112 1,501,925 17,324,123
Prior to the acquisition of UCA Services on May 20, 2005, the Company did not
have operating segments.
19
NETFABRIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
For the Three Months
ended March 31,
-----------------------
2006 2005
---------- ----------
Settlement of bridge loan with common stock $ -- $ 500,000
Contribution from officer, director and shareholder in
connection with settlement of disputes $9,492,070 $ --
Discount on revolving note relating to warrants $ 513,820 $ --
Discount on convertible note relating to warrants $ 918,923 $ --
Discount on convertible debt relating to beneficial
conversion feature $ 511,577 $ 67,500
Non-cash interest expense paid $ 47,500 $ --
Reissuance of warrants in connection with
debt extinguishment $ 372,353 $ --
Amortization of debt discounts $1,444,529 $ 221,873
NOTE 11. SUBSEQUENT EVENTS
On April 19, 2006, the Company sold Convertible Debentures (the "Debentures") in
the face amount of $500,000 to five individuals including $150,000 face value to
Fahad Syed, an officer and director, and $50,000 face value to Fred Nazem, a
stockholder. The Debentures bear interest at 8% and are due on June 17, 2006. At
the option of the Debenture holder, the Debentures can be converted into shares
of the Company's common stock at a conversion price of $.50 per share. In
connection with the sale, the Company issued two individuals warrants to acquire
an aggregate of 200,000 shares of its common stock with a nominal exercise
price. The warrants expire in three years from the date of issuance. For the
other three individuals, the Company issued an aggregate of 225,000 shares of
its common stock as additional consideration. For the three individuals, the
Company has agreed to place 3,000,000 shares of its common stock as collateral
with an escrow agent. There will not be any collateral for the Debentures issued
to Fahad Syed and Fred Nazem.
The Company used the proceeds from the sale of the Debentures to repay $500,000
due to Macrocom pursuant to Macrocom Debenture issued in July of 2005 (See Note
5).
On May 5, 2006, the Company announced its decision to exit from the
hardware-based VoIP communications product line (including resale of transport
services) that is targeted at small to mid-sized businesses. In accordance with
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", ("SFAS No. 144"), the Company will
present the results of operations from its VoIP business segment as discontinued
operations in future periods.
20
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and accompanying notes and the other financial information
appearing elsewhere in this report and reports included herein by reference. The
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements.
Our independent registered public accounting firm has indicated in
their report dated April 17, 2006 on our December 31, 2005 financial statements
that we had net losses from inception and have a working capital deficiency. The
report indicates that these matters raise substantial doubt about our ability to
continue as a going concern. Our plan with regard to this matter is discussed
elsewhere in this document. The condensed consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
CORPORATE HISTORY
NetFabric Holdings, Inc. ("Holdings" "our", "we" or the "Company") were
formerly known as Houston Operating Company and were incorporated in Delaware in
August of 1989. On December 9, 2004, we entered into an Acquisition Agreement
with all of the stockholders of NetFabric Corp. At the closing, which occurred
at the same time as the execution of the Acquisition Agreement, we acquired all
of the issued and outstanding capital stock of NetFabric Corp. from the
stockholders in exchange for an aggregate of 32,137,032 newly-issued shares of
our common stock. The acquisition was accounted for as a reverse merger whereby
NetFabric Corp. was treated as the acquirer. NetFabric Corp. was incorporated in
the State of Delaware on December 17, 2002, as a new corporation. On April 19,
2005, our name was changed from Houston Operating Company to NetFabric Holdings,
Inc. and our stock symbol was changed from "HOOC" to "NFBH."
UCA SERVICES, INC. ACQUISITION
On May 20, 2005, we entered into and closed on a share exchange
agreement, whereby we purchased all of the issued and outstanding shares of UCA
Services, Inc. ("UCA") from its shareholders in exchange for the issuance of
24,096,154 shares of our common stock. UCA is an IT services and solutions
company that serves the information needs of a wide range of Fortune 500 clients
in the financial markets industry as well as the pharmaceutical, health care and
hospitality sectors. UCA delivers a broad range of IT services in managed
services, professional services, infrastructure builds and maintenance and
application development and maintenance areas.
The acquisition was accounted using the purchase method of accounting
with the results of operations of UCA included in the consolidated financial
statements from the date of acquisition.
OVERVIEW
Prior to acquiring NetFabric Corp., we did not have any operations, and
we were a shell company whose primary business objective was to merge and become
public. NetFabric Corp., a Delaware corporation incorporated on December 17,
2002, began operations in July 2003. NetFabric Corp. is a provider of hardware
and services to small to mid-sized businesses ("SMBs") that utilize the Internet
for telephone communications or Voice over Internet Protocol ("VoIP"). It
develops and markets appliances or Customer Premises Equipment ("CPE") that
simplify the integration of standard telephone systems with an IP
infrastructure. In addition, it resells transport services of a third party VoIP
transport provider. Our operations, prior to the UCA acquisition, consisted of
developing VoIP appliances, including research and product development
activities. We also hired additional personnel for sales and marketing and
developed our sales and marketing programs.
Our revenues from VoIP operations have been minimal. We have concluded
that we cannot implement our original business for VoIP operations within
resources we have or with the additional capital we can raise in the near term.
In the recent past, we have scaled back our VoIP operations, including our
product development efforts. On May 3, 2006, our Board of Directors decided to
exit from the hardware-based VoIP communications product line (including resale
of transport services) that is targeted to SMBs. For the year ended December 31,
2005, and three months ended March 31, 2006 we had a losses (unaudited) of
$258,000 and $3,200,000, respectively, from our VoIP operations. We do not
anticipate incurring material exit costs upon our exit from VoIP operations.
UCA derives revenues primarily from managed IT services, professional
services, application development services and from business process management
services. Arrangements with customers for services are generally on a time and
material basis or fixed-price, fixed-timeframe revenue. UCA's principal
operating expenses are direct employee cost and consultant expenses and selling,
general and administrative expenses. Direct employee cost and consultant
expenses are comprised primarily of the costs of consultant labor, including
employees, subcontractors and independent contractors, and related employee
benefits. Approximately 50% of our consultants are employees and the remainder
are subcontractors and independent contractors.
21
We compensate most of our consultants only for the hours that we bill to our
clients, which allows us to better match our labor costs with our revenue
generation. With respect to our consultant employees, we are responsible for
employment-related taxes, medical and health care costs and workers'
compensation. Labor costs are sensitive to shifts in the supply and demand of IT
professionals, as well as increases in the costs of benefits and taxes. The
principal components of selling, general and administrative expenses are
salaries of sales and support personnel, and office rent.
As previously noted, the December 9, 2004 acquisition was
accounted for as a reverse merger whereby NetFabric Corp. was treated as the
acquirer. Accordingly, the historical financial statements of NetFabric Corp.
have been presented for all periods required. NetFabric Corp. began operations
in January 2003 and was a development stage company until the UCA acquisition.
The UCA acquisition was accounted for using the purchase method of accounting
with the results of the operations included in the Company's consolidated
financial statements from the date of acquisition.
We operate in two business segments in additional to corporate
activities: VoIP and IT Services. We conduct our VoIP operations through our
NetFabric Corp. subsidiary and our IT Services operations through our UCA
subsidiary.
Comparison of Three Months Ended March 31 2006 and 2005:
Revenues. Revenues for the three months ended March 31, 2006, increased by
$4,099,946 over the prior year, with such increase due to the UCA acquisition.
Prior to the UCA acquisition, the Company had minimal revenues during the
periods reported. We anticipate that our revenues will increase for fiscal year
2006 due to the full year impact of the UCA acquisition. On a pro forma basis,
UCA had revenues of $4,173,834 for the three months ended March 31, 2006.
Direct employee compensation and consultant expenses. For the three months ended
March 31, 2006, our direct employee compensation and consultant expenses
increased by $2,994,370 to $2,997,103. The increase was due to increased
revenues resulting from the UCA acquisition. We anticipate direct employee
compensation and consultant expenses to increase for fiscal year 2006 in line
with the anticipated increase in its revenues.
Selling, general and administrative expenses. Our selling, general and
administrative expenses increased for the three months ended March 31, 2006 by
$1,014,868 or 163.0% to $1,637,476. The increase was due to the UCA acquisition
though off set by reduction of expenses in our VoIP operations. During 2006, we
scaled back our VoIP operations and reduced our expenses in our VoIP operations.
Research and development. We did not incur any research and development expenses
for the months ended March 31, 2006 compared $134,475 incurred in the comparable
period in 2005. These expenses were incurred for our VoIP operations and
represented the product development costs for our VoIP products, including
associated engineering wages. In 2006, we have scaled back our development
activities, and we do not anticipate incurring any material additional
development expenses in fiscal year 2006.
Amortization of debt discount. Amortization of debt discount for the three
months ended March 31, 2006 increased by $1,230,774 or 554.7% to $1,452,647. The
increase was due to the amortization of debt discount resulting from the
allocation of value to certain equity instruments issued in connection with debt
issued in 2006 and 2005. At March 31, 2006 the aggregate unamortized debt
discount was $2,076,160, which will be amortized and charged to operations over
the term of the respective debt.
Depreciation and amortization. For the three months ended March 31, 2006
depreciation and amortization increased by $74,945 or 490.2% to $90,235, due to
additional assets arising from the UCA acquisition. Amortization related to
intangible assets acquired in the UCA acquisition was $55,004.
Interest expense. For the three months ended March 31, 2006 interest expense
increased by $66,281 to $77,232 due to increased borrowing levels in 2006.
Derivative Financial Instruments. As a result of the change in the conversion
terms of the October Convertible Debentures on October 27, 2005, we determined
that the embedded conversion feature of the October Cornell Debenture became
subject to the provisions of SFAS No. 133 and therefore we accounted for the
embedded conversion feature as a liability in accordance with the guidance of
EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock"("EITF 00-19"). Accordingly, we
recorded the fair value of the embedded conversion feature of $784,784 as a
non-current liability on its balance sheet as of October 27, 2005 and a portion
of the amounts previously recorded to additional paid-in capital as part of the
Original Cornell Debentures were reclassified from equity to liabilities. For
the three months ended March 31, 2006 we recorded a gain in value for derivative
financial instruments of $336,352 related to the change in fair value of the
embedded conversion feature which is recorded in the accompanying condensed
consolidated statement of operations. As a result of the Cornell Repayment, the
value of the embedded conversion future was reclassified to additional paid-in
capital.
22
Debt extinguishment costs. As part of the Cornell Repayment we paid an early
redemption charge of 15% of the principal amount redeemed or $248,724 which
charge is included on the accompanying statement for operations for the three
months ended March 31, 2006. In connection with the Cornell repayment we also
agreed to reduce the exercise price of the 560,000 warrants from $0.50 to $0.40.
The change in exercise price of the warrants was treated as a new issuance of
warrants and was valued using the Black Scholes option-pricing model. The
reduction in exercise price resulted in a fair value of $372,353 for the
warrants, which was charged to operations for the three months ended March 31,
2006.
Non cash charge for dispute settlement. In January 2006, we entered into a
termination agreement with a consultant. In connection with the termination, an
individual who is our officer, director and stockholder transferred on 1,000,000
shares of our common stock to the benefit of the consultant. We accounted for
the settlement expense, based on the value of the shares of our shares on the
settlement date ($0.95) during the three months ended March 31, 2006. In
February 2006, we entered into an amendment agreement with the former UCA
shareholders. Pursuant the amendment agreement, an individual who is our
officer, director and stockholder transferred 9,000,000 shares of our common
stock owned by him to former UCA shareholders. Sine the settlement was not a
contingency associated with the acquisition of UCA Services, we accounted for
the shares transferred by the individual as an expense, based on the value of
the shares, during the three months ended March 31, 2006.
Net loss. As a result of the foregoing, for the three months March 31, 2006, net
loss increased by $11,018,388 or 1,093.2% to a loss of $12,026,318, compared to
a net loss of $1,007,930 in the three months ended March 31, 2005. For the three
months ended March 31, 2006, we had a loss of $233,222 from our IT Services and
a loss of $258,035 from our VoIP Operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006, our working capital deficiency was $3,080,202
compared to a working capital deficiency of $2,176,606 at December 31, 2005. The
increase in the working capital deficiency was principally due to operating
losses. During the three months ended March 31, 2006, we utilized cash from our
operating activities of approximately $79,000 compared to approximately $755,000
utilized during the three months ended March 31, 2005.
During the three months ended March 31, 2006, our operating losses,
after adjusting non cash items utilized approximately $838,000 of cash, and
working capital items provided approximately $759,000 of cash. The principal
component of working capital was a decrease in our accounts payable and accrued
expenses offset by an increase of deferred revenue or customer advance. During
the three months ended March 31, 2005, our operating losses after adjusting for
non cash items utilized approximately $735,000 of cash and working capital items
utilized approximately $20,000 of cash.
Pursuant to a financing commitment, in two separate closings in January
and March 2005, we sold 1,000,000 shares of common stock to Macrocom Investors,
LLC.("Macrocom") and 1,000,000 shares of common stock to Michael Millon,
resulting in aggregate proceeds of $1,000,000 for $0.50 per share. Additionally,
under this arrangement, Macrocom received warrants to purchase 2,000,000 shares
of common stock at a purchase price of $1,500,000. The warrants expire in
December 2006. We also issued 250,000 shares to Michael Millon as consideration
for arranging the Macrocom financing.
In February 2006, we repaid $ 70,000 owed to Fred Nazem, a stockholder
of the Company and $200,000 owed to Fahad Syed, an officer and director of the
Company. In addition, we repaid $100,000 due to Faisal Syed, a stockholder of
the Company. Prior to our acquisition of UCA, UCA issued a promissory note to
Faisal Syed for $100,000. The note bore interest at the rate of 6%. The
promissory note together with accrued but unpaid interest, was due in June 2005.
In February 2006, we along with our subsidiaries, entered into a
Security Agreement, dated February 10, 2006 with Laurus Master Fund, Ltd., a
Cayman Islands company ("Laurus"). Under the Security Agreement, Laurus
purchased us a Secured Convertible Note, with a maturity date of February 10,
2009, in the aggregate principal amount of $1,500,000 and a Secured
Non-Convertible Revolving Note ("Revolver') in the aggregate principal amount of
$1,500,000. Availability under the notes is based on an advance rate equal to
90% of eligible accounts receivable, and Laurus has agreed to provide us an over
advance for a specified period. The Secured Convertible Note has a three-year
term, and bears interest at 1% above the prime rate, with a minimum interest
rate of 8%. Laurus shall have the option, but not the obligation, at any time
until the maturity date, to convert all or any portion of the Secured
Convertible Note and accrued interest into shares of our common stock at an
exercise price of $0.91 per share. If converted in full we would be obligated to
issue an aggregate of 1,648,352 shares of our common stock. We have the option,
to prepay the Secured Convertible Note by paying Laurus the applicable
redemption premium. The Revolver has a three-year term, and bears interest at 1%
above the prime rate, with a minimum interest rate of 8%.
In connection with the borrowing, we issued to Laurus a common stock
purchase option ("Option") to purchase up to 4,256,550 shares of our common
stock for nominal consideration. Additionally, we entered into a registration
rights agreement ("Registration Rights Agreement"), covering the registration of
common stock underlying the Secured Convertible Note and the Option. Our
obligations under the Secured Convertible Note and the Revolver are secured by
first liens on all of our assets, and Laurus may accelerate all obligations
under the notes upon an event of default.
23
Our initial borrowing was approximately $2,300,000 and we utilized
approximately $1,900,000 of the initial borrowing to repay all amounts owed to
Cornell pursuant to a Secured Convertible Debenture, including an applicable
redemption premium. At March 31, 2006, our availability and aggregate borrowings
with Laurus was approximately $2,500,000 (face amount).
Our revenues from VoIP operations have been minimal. We have concluded
that we cannot implement our original business for VoIP operations within our
resources or with the additional capital we can raise in the near term. On May
3, 2006, our Board of Directors decided to exit from the VoIP business. We do
not anticipate incurring material exit costs upon our exit from VoIP operations.
For the past two years, on a pro forma basis, our IT services revenues
have grown. For continued growth, we need capital for both technology
investments and working capital. Technology investments will improve our
consultants with new skills thereby enabling us to obtain additional projects
from our existing customers and from new customers. We can accomplish this
either through investment and strategic partnership with new software companies
or through hiring consultants and paying for their bench time until we obtain
projects where they can be placed on a billable basis. We are in discussion with
new software companies and anticipate such an investment to amount to
approximately $500,000 in 2006. However, we have not finalized any agreement and
there is no assurance that we that we will finalize any agreement and invest
additional amounts. Working capital requirements are principally for additional
receivables that need to be supported by an increased revenue base resulting
from anticipated growth. We believe that the Revolver with Laurus will provide
us the necessary working capital required for the accounts receivable growth.
We anticipate our recurring capital expenses for 2006 to range between
$50,000 and $100,000. We are also evaluating the need for additional software
applications to support our back office functions. However, we have not
completed our evaluation and do not have any commitment on this account.
In order to execute our business plan and achieve our objectives for
the near future, management believes it will require approximately $2,500,000
over the next 12 months for working capital. A significant component of this is
for satisfying our obligations as they become due, both borrowing and vendor
payables. Our ability to continue as a going concern and our future success are
dependent upon our ability to raise capital in the near term to satisfy our
current obligations. Management's plans in this regard include, but are not
limited to current discussions and negotiations with a number of additional
financing alternatives, one or more of which it believes will be able to
successfully close to provide necessary working capital. There is no assurance
that the Company will be successful in completing the financing. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
To fund our operations for the remainder of fiscal year 2006, we need
to raise additional financing and generate cash flows from our operations.
Should additional cash flows not be available, we believe that we would have the
ability to restructure our operations, and if necessary, initiate significant
reductions in expenses. In addition, we will have to negotiate with our lenders
to extend the repayment dates of our indebtedness. There can be no assurance,
however, that we will be able to successfully restructure our operations or debt
obligations in the event we fail to obtain additional financing.
24
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial conditions and results of
operations is based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, accounts receivable and long-lived assets. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the current circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the judgment and
estimates used in preparation of our consolidated financial statements.
Revenue Recognition
We derive revenue as a provider of IT services.
In accordance with Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 104, "Revenue Recognition," revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product or services has
occurred, the fee is fixed and determinable, collectibility is reasonably
assured, contractual obligations have been satisfied, and title and risk of loss
have been transferred to the customer.
Arrangements with customers for services are generally on a time and material
basis or fixed-price, fixed-timeframe. Revenue on time-and-material contracts is
recognized as the related services are performed. Revenue for fixed-price,
fixed-timeframe services is recognized as the service is performed. Revenue from
fixed-price, fixed-timeframe service contracts is recognized ratably over the
term of the contract, as per the proportional performance method. When we
receive cash advances from customers in advance of the service period, amounts
are reported as advances from customers until the commencement of the service
period. Billings and collections in excess of revenue recognized are classified
as deferred revenue.
To date we have had minimal revenues from sale of communication equipment
products that have been marketed only through a network of distributors and
value added resellers ("VARs"). In the VAR channel, we recognize revenue at the
time of shipment if all other contractual obligations to the VAR have been
satisfied.
In the distributor channel, we recognize revenue when the distributor sells and
ships our products to its own VARs, resellers or end-user customers, provided we
have satisfied all other terms and conditions with the distributor. Accordingly,
we receive distribution sales and inventory information regarding our products
from our distributors for the purpose of determining the appropriate timing of
revenue recognition.
Both VARs and distributors have limited rights to return products to us but must
obtain prior approval from us before returning products, consistent with common
industry practice. We have no obligation to accept the return of any unsold
products. If required, we accrue a provision for estimated sales returns and
other allowances and deferrals as a reduction of revenue at the time of revenue
recognition. To date no sales have been made and, as such, no provisions for
estimated sales returns and other allowances have been recognized. We have no
obligation to provide service, repair, counseling or other assistance to any
customers of the VARs or distributors unless we have a specific agreement
directly with such customer.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. These estimated losses
are based upon historical bad debts, specific customer creditworthiness and
current economic trends. If the financial condition of a customer deteriorates,
resulting in the customer's inability to make payments within approved credit
terms, additional allowances may be required. We perform credit evaluations of
our customers' financial condition on a regular basis.
Inventory
Inventory consists primarily of finished goods and purchased electronic
components, and are stated at the lower of cost or market. Cost is determined by
using the first-in, first-out method.
25
Fair Value of Financial Instruments
The fair value of the Company's assets and liabilities that qualify as financial
instruments under Statement of Financial Accounting Standards ("SFAS") No. 107
"Disclosure about Fair Value of Financial Instruments", presented in the
consolidated balance sheets as of March 31, 2006 and December 31, 2005
approximate their carrying amounts.
Goodwill and Other Intangibles
Goodwill and other intangibles represent the allocation, pursuant to an
independent appraisal of the cost to acquire UCA Services, in excess of the fair
value of assets acquired. Under SFAS No. 142, "Goodwill and Other Intangible
Assets", goodwill is not amortized but is reviewed for impairment annually, as
well as when a triggering event indicates impairment may have occurred. The
goodwill test for impairment consists of a two-step process that begins with an
estimation of the fair value of the reporting unit. The first step of the
process is a screen for potential impairment and the second step measures the
amount of impairment, if any. We will perform a goodwill impairment test
annually, as well as when a triggering event indicates impairment may have
occurred. Application of the goodwill impairment test requires significant
judgments including estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term rate of growth, the useful life
over which cash flows will occur, and determination of cost of capital. Changes
in these estimates and assumptions could materially affect the determination of
fair value and/or conclusions on goodwill impairment. Intangible assets are
accounted for under the provisions of SFAS No. 142. Intangible assets arise from
business combinations and consist of customer relationships and restricted
covenants related to employment agreements that are amortized, on a
straight-line basis, over periods of up to six years. The Company follows the
impairment provisions and disclosure requirements of SFAS No. 142. Accordingly
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Stock-Based Compensation
Beginning January 1, 2006, we account for stock-based compensation in accordance
with the fair value recognition provisions of SFAS 123R. Under the fair value
recognition provisions of SFAS 123R, share-based compensation cost is measured
at the grant date based on the value of the award and is recognized as expense
over the vesting period. Stock-based compensation expense is calculated using
the Black Scholes option pricing model on the date of grant. This option
valuation model requires input of highly subjective assumptions. These
assumptions include estimating the length of time employees will retain their
vested stock options before exercising them ("expected term"), the estimated
volatility of our common stock price over the expected term, and the number of
options that will ultimately not complete their vesting requirements
("forfeitures"). Changes in these assumptions can materially affect the estimate
of the fair value of employee stock options and consequently, the related amount
of stock-based compensation expense recognized in the condensed consolidated
statements of operations.
26
ITEM 3. CONTROLS AND PROCEDURES
A. Evaluation of Disclosure Controls and Procedures:
Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time period
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
are accumulated and communicated to management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO") , as appropriate, to allow
timely decisions regarding required disclosure. As of the end of the period
covered by this report, we carried out an evaluation, under the supervision and
with participation of our management, including our Chief Executive officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon and as of the date of that
evaluation, the CEO and CFC concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports we file and submit under the Exchange Act are recorded, processed,
summarized and reported as and when required.
B. Changes in Internal Control over Financial Reporting:
There were no changes in our internal controls over financial reporting
identified in connection with our evaluation of these controls as of the end of
the period covered by this report that could have significantly affected those
controls subsequent to the date of the evaluation referred to in the previous
paragraph, including any correction action with regard to significant
deficiencies and material weakness.
PART II. OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended March 31, 2006,
We issued 50,000 shares of our common stock to Macrocom Investors, LLC to pay
the accrued interest in kind. We also issued a vendor10626 shares of our common
stock to offset amounts owed to the vendor.
On February 13, 2006, we entered into an agreement (the "Amendment") to amend
the terms of the Share Exchange Agreement (the "Agreement") by and among the
Company, UCA Services, Inc. ("UCA") and UCA Shareholders, dated May 20, 2005.
Pursuant to the Amendment, we issued an aggregate of nine million shares of our
common stock to the former Shareholders of UCA. To facilitate the transaction,
Mr. Jeff Robinson, our CEO surrendered to us nine million shares of our common
stock owned by him.
The foregoing shares were issued pursuant to exemptions from registration under
Sections 3(a)(9) and 4(2) of the Securities Act of 1933.
ITEM 3. Default Upon Senior Securities
None
ITEM 4. Submission of Matter to Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)
31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)
32.1 Section 1350 Certification (CEO)
32.2 Section 1350 Certification (CFO)
(b) Reports on Form 8-K:
During the three months ended March 31, 2006, the Company filed;
(i) an 8-K for the event dated February 13, 2006 under Items 1.01 and 3.02 to
report an amendment to the Share Exchange Agreement with former UCA
Shareholders.
(iii) an 8-K for the event dated February 14,2006 under Items 1.01, 2.03 and
3.02 to report a financing transaction with Laurus Master Fund. LLC.
27
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act , the registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: May 22, 2006 By: /s/ Syed Fahad
----------------------------
Syed Fahad
Chairman and Chief
Executive Officer
By: /s/ Vasan Thatham
----------------------------
Vasan Thatham
Principal Financial Officer and
Vice President
28
EXHIBIT 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002 I, Syed Fahad, Chairman and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of NetFabric Holdings, Inc (the" Company"). 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d 15 for the Company and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Reserved] c) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter ( the Company's fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. May 22, 2006 /s/ Syed Fahad - ------------------------------------------- Name: Syed Fahad Title: Chairman and Chief Executive Officer
EXHIBIT 31.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002 I, Vasan Thatham, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of NetFabric Holdings, Inc(the" Company"). 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d 15(e) for the Company and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Reserved] c) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. May 22, 2006 /s/ Vasan Thatham - ------------------------------- Name: Vasan Thatham Title: Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NetFabric Holdings, Inc. (the
"Company") on Form 10-QSB for the period ended March 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Syed
Fahad Chairman and Chief Executive Officer, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
May 22, 2006
/s/ Syed Fahad
- ---------------------------------
Name: Syed Fahad
Title: Chairman and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to NetFabric Holdings, Inc. and will be retained by NetFabric Holdings,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NetFabric Holdings, Inc. (the
"Company") on Form 10-QSB for the period ended March 31, 2006 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Vasan
Thatham, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
May 22, 2006
/s/ Vasan Thatham
- ---------------------------------
Name: Vasan Thatham
Title: Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to NetFabric Holdings, Inc. and will be retained by NetFabric Holdings,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.